Who Gets the Book?

Q: I had an oral contract with my partner that I would inherit his $40 million book when he retired in two to three years, but he was laid off in the middle of the transition period and now my branch manager has told me that I won't get the book. The reason he gave was that since my partner was let go before retiring, the book should be split according to the firm's policies, which favors the top

Jan 01, 2006

Q:

I had an oral contract with my partner that I would inherit his $40 million book when he retired in two to three years, but he was laid off in the middle of the transition period and now my branch manager has told me that I won't get the book. The reason he gave was that since my partner was let go before retiring, the book should be split according to the firm's policies, which favors the top producers. I objected. My name appears with my partner's on all the accounts in the book, which was split 99-to-1 in his favor. The clients have already received a letter stating that I was chosen by my partner to take over the accounts, and I have communicated with almost all of them in the four months since I have been in production. Please advise me as to my rights.

A:

At the outset, my advice is that you have viable claims against your firm for breach of contract, detrimental reliance and unfair business practices.

My starting point is the general rule that was adopted and articulated by the NASD a few years ago, which arose out of the numerous raiding and noncompete cases that were crowding its dockets. It states that clients do not belong to brokers or brokerage firms and are not chattel that can be restricted, by any contract between the firm and the broker from using any broker or brokerage firm of their choice. In other words, a broker's “book of business” does not create a contract between the broker and the firm, nor does the client belong to any particular broker. The rule is that clients can choose to do business with anyone or any firm they select and neither a broker nor a firm can do anything to interfere with the free choice of the client.

Having said that, however, there are certain rights that you have vis-à-vis your firm. First, you had a partnership with your senior broker, albeit it was a 99-to-1 split. Nonetheless, both brokers' names were on the statements that went out to the clients. The firm acknowledged that arrangement by allowing both brokers' names to appear on the statements and by allowing the clients to believe that a team was handling their account.

Second, apparently there were discussions between you and your firm's management to the effect that the joint accounts would go to the remaining partner of that team. I assume management approved the letters sent out to clients, as all correspondence is required to be approved. The firm, therefore, allowed you to assure clients that you would be remaining at the firm and would continue to serve their accounts. While the clients certainly had the right not to stay with you, that is the clients' choice, not the firm's, particularly after the firm allowed you to handle the accounts with a dual representative number, allowed you to send out letters to the team clients letting them know you would be remaining and would be available to continue to handle their accounts.

In my opinion, the firm entered into an implicit agreement with you that you had first dibs on the clients that were managed in a dual-broker capacity. There does not appear to be any good reason for the firm to renege on that agreement. By doing so, they are acting in bad faith, breaching an implied contract and the implied covenant of good faith and fair dealing, and interfering with the broker's reasonable expectations.

I would suggest you retain counsel promptly. Through counsel, you should assert your rights by written notification to the firm. You should not attempt to deal with this yourself and would be better served to have your lawyer speak on your behalf so you can focus on business and avoid any unpleasant interaction with firm management.

If the firm refuses to let you keep the book, you can stay at the firm and initiate arbitration against it. Once you initiate arbitration, the firm is not in a position to terminate you. If they do, they expose themselves to an unlawful, bad faith, retaliatory termination suit. If they don't and you do what you are told to do and follow the directions of your supervisors while they split the book up amongst other, more senior brokers, they run the risk that any business done by the other brokers and the firm may ultimately have to be paid to you.Erwin Shustak Shustak Jalil & Heller San Diego 619-696-9500[email protected]

A:

From the information provided, it appears that you were a junior member of a production team. Such arrangements are common in the industry, providing less experienced brokers with the skills necessary to handle more sophisticated clients and transactions.

Generally speaking, the senior representative receives the lion's share of commissions. Junior members of a production team are expected to grow into the responsibility and demonstrate that he or she has the ability to handle the client relationships. It appears from your narrative that your manager, your partner and your firm anticipated that you would have two or three years in the industry to gain the experience necessary to handle these client relationships.

While circumstances have drastically changed with the termination of your partner, such change does not mean you gained the skill set necessary to manage these relationships during your time as a junior member of the production team. First, discuss with your manager whether he or she feels you have the requisite experience to maintain these relationships. If the firm feels that you are not ready to assume these responsibilities, recognize that these concerns may have merit. Firms expose themselves to litigation, regulatory problems and loss of customer assets when inexperienced registered representatives handle accounts.

You should also individually assess whether you feel ready to manage these relationships. You will expose yourself to a host of legal and regulatory problems if you bite off more than you can chew. As a registered representative you are required, pursuant to NASD Rule 2110 to “observe high standards of commercial honor and just and equitable principles of trade.” If you accept more responsibility than you can handle, you will do your clients a disservice.

Practically speaking, it may be prudent to explore with your manager establishing an arrangement(s) similar to the one you had with your previous partner. Under such a scenario, you benefit both financially and professionally from this mentoring relationship, rather than losing the customers entirely.

Likewise, your clients will benefit from a more experienced representative and also, through continuity of care, by retaining you on the account. Rather than litigating what will likely be a no-win situation, try and work within the system. Review your firm's written procedures on account distribution to determine what internal recourse you have, if any. An “oral contract” such as this would likely not be enforceable.Jennifer Woods Burke Lubiner & Schmidt Cranford, N.J. 908-709-0500[email protected]